Why Clearing the Way for Qualcomm Was a Wise Move for Intel

Intel's smartphone market exit was inevitable.

Intel's (INTC) ceding of Apple's (AAPL) 5G effort to Qualcomm (QCOM) might initially look like a loss. But it isn't.

Shares of the Santa Clara-based semiconductor leader have jumped in morning trading as the market appears to recognize the business sense behind Intel's exit from its Apple relationship. The stock was the biggest gainer in the Dow through morning trading.

"We are very excited about the opportunity in 5G and the 'cloudification' of the network, but in the smartphone modem business it has become apparent that there is no clear path to profitability and positive returns," Intel CEO Bob Swan said on Tuesday evening.

Stifel analyst Kevin Cassidy pointed out that Intel was not likely to catch up to Qualcomm in 5G smartphones in the first place, making its heavy spend on the low margin business counterproductive. As such, it was better to quit early.

However, the company will not miss out on the 5G shift entirely.

"5G continues to be a strategic priority across Intel, and our team has developed a valuable portfolio of wireless products and intellectual property," Swan said. "We are assessing our options to realize the value we have created, including the opportunities in a wide variety of data-centric platforms and devices in a 5G world."

Cassidy added that the move was a pivot to a more profitable opportunity in its core business areas related to PCs, infrastructure, and data center rather than smartphones.

"We believe this is a pragmatic approach by Intel to focus on its areas of expertise rather than chasing low margin business," he explained. "In our view, 5G infrastructure design will have considerable overlap with current data centers - thus representing a more attractive market for Intel."

While ceding a big market to a competitor is not necessarily an overall positive, especially as the company attempts to correct its trajectory after a time in the desert while navigating sans a CEO, the pragmatism is appreciated among those following the stocks.

"We continue to believe Intel has long term structural issues, but admit the baseband exit is likely to support the shares for now," Bernstein analyst Stacy Rasgon said.

While he indicated more details on the departure will be necessary to form a firm thesis on the stock, Rasgon said he speculated the move could bring "several hundred basis points of gross margin expansion."

The termination of the Apple relationship also allows the company to more aggressively cut costs as it pinpoints more pertinent opportunities.

"While it probably would have been better for Intel to exit on less abrupt terms, we see the loss of Apple as an accelerant for the opportunity to reduce spending and increase focus on the core, which is central to our Overweight view on Intel," Morgan Stanley analyst James Faucette commented. "So the overall profit impact is on the small side - but the benefit of focus on the core business, and the directional benefit of new CEO Bob Swan showing an orientation towards cost cutting, is a substantial positive."

More details on the effect of the development are expected to be forthcoming during Intel's earnings conference call on April 25.

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